Before we get into the regulations governing hard money loans, let us start with what they are.
Hard money lending – what is it?
Unlike conventional lending institutions, such as banks and credit unions, private investors – or a group of them – fund hard money loans. You can secure these short-term loans via real estate. We say short-term because most such loans have terms that last for 12 months. That doesn’t mean there are no extensions since there are terms that last for 2-5 years. Usually, you repay hard money loans with monthly payments consisting only of interest. But there are cases where some principal may also be paid until the term’s end when you pay off with a balloon payment.
How much you may borrow will depend on the property you put up against the loan. Therefore, a hard money lender is typically concerned with the value of that property. Other considerations that are of value in conventional lending, such as the borrower’s credit, don’t matter as much in hard money lending. Thus, you may have an alternative if the bank rejects your loan due to less-than-optimal credit, etc.
Hard money loans – what are there sources?
Your lender may be loaning you the money from one of the numerous sources mentioned below:
- Different investors contributing to a fund, which the hard money lender then uses
- The hard money lender is using their own personal funds to loan you the money
- Individual trust deed investors are the source of the capital headed your way
Hard money – why should you use it?
As mentioned above, certain situations make hard money very advantageous. The main reason is not getting approval from a bank for a loan. But other reasons, such as having a foreclosure on your credit report, also exist. Hard money agreements may also be much more flexible than traditional loan agreements. Since most hard money lenders won't have a standardized underwriting process, you have another advantage on your side. They will evaluate your case on its own merit. So, they may also consider your financial situation and tweak the repayment schedules to suit it.
Hard money loan – what is the breakdown like?
Say, you are interested in making a commercial real estate purchase. Here’s how your lender may structure your loan:
- Conforming or hard money loan (65%)
- Cash or additional real estate as collateral for borrower equity (20%)
- Mezzanine loans, such as seller carrybacks (15%)
Hard money lending – who regulates it?
The state controls the regulations that govern hard money lenders operating in it. You can be more certain of the legitimacy of Hard Money Lenders Houston if they possess an OCCC license. But don’t take their word that they are licensed to operate in your state. Ask them to show you their OCCC license. What good would it do? Well, for one, the OCCC reviews each licensed lender’s records periodically. This step should be one of the many steps you should be carrying out while conducting your initial evaluation. We mention other red flags below.
Besides that, visit the Better Business Bureau website to research your potential hard money lender’s reputation further.
Hard money lenders – which red flags should you look out for?
So, you have checked whether a potential lender has the license to be working in Houston or not. Good! Now, consider another red flag – a big one – do they require any fees upfront or not? If they ask for money and points before they get started, stop, and ask more questions. Chief amongst them should be if they are asking for money now, what other things will they charge you for while repaying the loan? Don’t sign anything until your lender openly walks you through all the fees and the conditions of a loan. They shouldn’t be trying to get out of this. But don’t just take their answers as enough. Question why they are charging you for specific services. Then deliberate if their justification makes sense to you.
Did they shy away from a full disclosure? No? Good. Let us move on to the next test. Do they seem wary about meeting with you in person? Are they okay with talking to you over the phone? Their putting off most opportunities when you ask to use traditional means of communication should alarm you!
Finally, where you are located will have an effect on the interest rates that you end up paying. The primary factor behind this variation between different locations is due to supply and demand. You may have to pay more or lesser than the average interest rate in the country, depending on your geographic location. Again, discussing these matters openly with your would-be lender can clarify things for you. Better done early than receiving a nasty shock later on. Right?
We hope we have armed you with sufficient information to seek out a credible hard money lender. Refuse to work with anyone who operates with less than 100% transparency!